Gold-hunting in a frugal age

THE age of austerity shows no signs of waning. The International Monetary Fund reckons that the rich world’s economies will together grow by a paltry 1.3% this year, down from 1.6% in 2011. Britain’s government now says its fiscal squeeze will last until 2018. America’s is preparing to introduce tax rises and spending cuts. The euro zone’s situation is so dire that four countries (Cyprus, Greece, Poland and Portugal) have decided they cannot afford to take part in next year’s Eurovision Song Contest.

This slow-growth environment is confronting the West with all sorts of unwelcome questions. How can businesses prosper when their customers are feeling the pinch? How can governments look after the needy when their budgets are being squeezed? And how can ordinary people make ends meet when the economy is stagnating? Four answers stand out from the rubble of broken business models and failing government policies.

The first is to look to emerging markets for inspiration. Multinationals are applying to rich countries the lessons learned from reaching customers in poor ones. Unilever has enjoyed success selling consumer goods in small portions to Indians whose grocery budgets could not stretch to Western-sized packets; now it is offering shrunken packs of detergent to cash-strapped Spaniards and modest packages of mashed potatoes to impoverished Greeks. Policymakers are also looking east. In America the White House’s Office of Social Innovation has examined grassroots innovators from emerging markets. In Britain David Cameron has praised India’s innovative spirit; and the National Endowment for Science, Technology and the Arts has produced a report on what Britain can learn from how India deals with scarcity.

The second answer is to adjust corporate policies to a world of stagnant wages and growing inequality. Many companies continue to aim their products at the middle classes. But their numbers are shrinking, as the marginalised are going mainstream: the Pew Charitable Trusts reckons that nearly a third of Americans who, as teenagers in the 1970s, belonged to the middle class (in British terms, the working class and above) have slipped below it as adults. Jaideep Prabhu, of Cambridge University’s Judge Business School, argues that companies therefore need to create separate brands for frugal products without damaging their main brands’ image among the better-off.

Some already do: Renault is selling stripped-down, cheap-and-cheerful motors under its Dacia brand. It is vital that salespeople are given the incentives to promote these cheaper products, says Mr Prabhu. Procter & Gamble has split its sales force into two groups, specialising in either high-income or low-income markets, the latter being paid to peddle a new range of cheaper products, such as Luvs diapers and Gain detergent.

The third answer is to seek the “fortune at the bottom of the pyramid”. In 2004 C.K. Prahalad, another business guru, urged companies to pay attention to the world’s poorest because they collectively represented a huge market. The same logic is now being applied to the poorest Westerners (there are 46m Americans living in poverty and almost 50m still without health-care insurance). Young entrepreneurs are trying to provide poor people with innovative services partly because they want to do good, but also because they see big gaps in the market.

Revolution Foods is trying to wean young Americans off junk food by serving healthy school meals and providing advice on nutrition. It serves 120,000 school meals a day, employs more than 750 people, many of whom were once unemployed, and has signed deals to sell prepared meals in shops such as Toys “R” Us and Whole Foods. Conversion Sound plans to sell hearing aids for $50-200 rather than the $2,000-3,000 that is often charged: customers can test their hearing using apps on their smartphones rather than going to expensive audiologists. Young entrepreneurs are being joined by big companies: this week Google began selling basic laptop computers to schools for just $99.

That leads on to the fourth answer: to harness the power of new technology. The internet provides entrepreneurs with powerful tools for launching businesses that attack high-cost incumbents. The Khan Academy, a virtual university founded in 2008, does an impressive job of fulfilling its mission to provide “a free world-class education to anyone anywhere”. PayNearMe helps the 24% of American families who lack credit or debit cards to buy things online. Social-media sites let people rent out spare bedrooms, borrow tools and pass on outgrown children’s clothes. The “maker movement” is radically reducing the cost of an astonishing range of products: enthusiasts are now producing do-it-yourself drones for just a few hundred dollars that can be used to help manage crops or monitor troublesome neighbours.

The shrinking but comfortable middle

There are plenty of reasons for Western business to resist the new gospel of frugality. Why look at the bottom of the pyramid when there are still millions of people in the middle? Why risk introducing cheap brands that could cut into sales of your existing ones? Health-care companies will fight hard to defend the fat margins they get from America’s profligate system. Bricks-and-mortar universities will argue that they provide the camaraderie and connections that online ones struggle to offer.

But the forces of frugality are nevertheless powerful. The rich world is ageing. By 2030 a quarter of Europeans will be over 65. Lean emerging-market firms are challenging Western ones in everything from white goods (Haier) to telecoms equipment (Huawei) to baked goods (Bimbo). It is going too far to say that austerity is turning out to be not just an age but an aeon. But it would make sense for business and governments in the West to start acting as if that might be the case.

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